Times of market turmoil often present the best buying and selling opportunities for savvy investors. Selling their winners at the peak of gains and buying solid companies trading below their intrinsic value. I believe the SPDR Gold Shares (GLD) has reached a short term top and is on the precipice of a major pull back. On the other hand Citigroup Inc. (C) has been completely routed over the last month and is trading below its intrinsic value.
Contrarians find their best investment opportunities during times of panic. The bear market of 1974 gave Warren Buffett the opportunity to purchase a stake in the Washington Post Company (WPO). This one investment subsequently provided Buffett with more than a hundred-fold return. One of Buffett's famous quotes is, "Look at market fluctuations as your friend rather than your enemy, profit from folly rather than participate in it."
Why Sell Gold?
As for selling gold, there are two major reasons we may be at a short term top. First, gold has gone parabolic over the last few sessions, creating an unsustainable trend line bound to be broken. Both Rich Ilczyszyn Of Lind Waldock and strategic investor Dennis Gartman are skeptical of gold's prospects near term.
”I’d be bullish but a lot less bullish than I was – I think it’s time to cut the position by half,” says Gartman regarding gold. Largely Gartman thinks gold is too crowded. Ilczyszyn adds, ”We’ve gone $100 in three days. I’d also take profits and maybe even go short. We’ve just gone too far too fast.”
Secondly, the U.S. exchange operator CME Group (CME) said late Wednesday it is raising the margin requirements for trade in a wide range of gold products, effective Thursday. The speculative margin requirement for a new position in Comex 100 gold futures will rise to $7,425 from $6,075, or to $5,500 from $4,500 for existing "current maintenance" margins. Gold may continue higher based on its “safe haven” status, but I see a near term pullback of 5% to 10%. As many of you may know from my past articles, I am not a gold bug. Please review the following chart of the SPDR Gold Shares' one-year performance.
Why Buy Citigroup?
Regarding Citigroup, our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you've kept your powder dry and taken advantage. The market is clearly at an inflection point. To open a position you must have courage in your convictions. Just remember, fortune favors the bold. A market correction provides opportunity to buy great names at a discount price.
Citigroup is as extremely oversold as gold is overbought right now. Citigroup is trading at a forward P/E ratio of 5.46, a Price/Sales ratio of 1.47, a Price/Book Ratio of 0.53 and a PEG Ratio of 0.60. The PEG ratio is a broadly-used indicator of a stock's prospective worth. It is preferred by numerous analysts over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued. Many financiers use 1 as the cut-off point for PEG ratios. A PEG of 1 or less is believed to be favorable.
Citigroup has dropped approximately 33% over the last month from $42 on July 7 to $29 currently based on macro-economic circumstances that are bound to change creating this optimal buying opportunity. The company is trading below analysts' estimates. Citigroup has a median price target of $55 by 22 brokers and a high target of $66. The last up/downgrade activity was on Jun 21, 2011, when Standpoint Research initiated coverage on the company with a Buy rating. Please review the following chart of Citigroup's one-year performance.
In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the consensus, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. I believe Citigroup may present such an opportunity.